By Grant Edrington – Updated August 8th, 2023
Do you dream of owning a home, but aren’t quite sure of the requirements to make it a reality? If you’re a first-time homebuyer, it’s normal to not know where to begin. Arming yourself with the right information can help you more easily navigate the process.
In this article, we’ll provide an overview of the financial requirements you’ll need to secure financing and share steps you can take to confidently navigate the homebuying process. So, let’s dive in and discover what it takes to buy a home. Here are the topics we’ll cover:
- What’s the First Step in Buying a House?
- 7 Requirements to Buy a House
- How Much Money Should I Save Before Buying a House?
- Divvy’s Requirements for Rent-to-Own
What’s the First Step in Buying a House?
The first step in buying a home is to look at your financial situation and determine your budget. Start by reviewing your income, expenses, and savings to understand how much you can afford to spend on a home on a monthly and overall basis. Consider factors like your credit score, existing debts, and employment stability. Once you have a clear understanding of your financial standing, you can then start exploring mortgage options and getting preapproved for a loan. This initial step will lay the foundation for the rest of your homebuying journey.1,2,3
7 Requirements to Buy a House
There are several requirements to keep in mind in order to purchase a home. Understanding more about these requirements and what options are available to you can help you more confidently approach homeownership and securing a mortgage.
1. The Down Payment
First, you’ll want to determine your budget and what you can comfortably afford, factoring in your mortgage, utilities, and any additional monthly costs that accompany your new home. Once you have a budget in mind, you’ll want to set aside money for your downpayment. This upfront payment is used to reduce the amount you’ll have to borrow. In addition to reserving funds for your downpayment, you may also want to consider setting aside additional money for closing costs
If you want to secure a more favorable interest rate for a mortgage, it’s recommended to have a down payment of at least 20% of the price of your home. Not only will this help you save on monthly costs in the long run, but it also allows you to avoid private mortgage insurance (PMI).
However, if you don’t have enough money for a 20% down payment, there are several government-backed programs that can help you offset those costs.1, 2,3,6
- The Federal Housing Administration (FHA) loan only requires a 3.5% down payment for borrowers with a credit score of 580 or higher. With their approval, you can obtain a loan from a bank where the federal agency acts as your mortgage insurer.
- If you’re a veteran of the U.S. Armed Forces, you may be eligible for a Veterans Administration-backed loan, which can offer up to 100% financing.
- For those seeking to purchase a home in rural areas, the U.S. Department of Agriculture (USDA) provides its own home loan program that helps people with lower to moderate income. This program also offers up to 100% financing.
- If you’re struggling to gather the necessary down payment, there are other options available. The federal Housing and Urban Development (HUD) Department offers a down payment assistance program specifically designed for first-time homebuyers. This program is administered by the states, each with its own set of rules.
Another possibility is to consider asking a family member for a down payment gift. Keep in mind that there may be limitations on down payment gifts, and it’s important to properly document the gift with a down payment gift letter.
Looking to buy a home with no money down? In some cases, it may be possible to secure a mortgage with zero down payment.
2. Check Your Credit Score
When you apply for a mortgage, lenders take into account your complete financial situation, and your credit score plays a crucial role in their assessment.
Before applying for a mortgage, it’s beneficial to check your credit score and see if there are any opportunities to improve it. This will give you a clearer understanding of whether you meet the lender’s requirements for purchasing a home and can provide insight into the interest rates you’re likely to encounter as you seek out a mortgage. You can request a free copy of your credit report from the main reporting agencies and check your score through your credit card company, financial institution, or other free reporting companies.
Your credit score serves as an indicator to lenders of your likelihood to repay the borrowed money. A higher credit score usually translates to better interest rates. On the other hand, having a poor score or no credit history at all can make it extremely challenging to qualify for a loan.
Finding a lender willing to work with borrowers who have a credit score below 620 or 640 can be quite difficult. However, the FHA offers mortgage backing for qualified buyers with credit scores as low as 500.1, 3, 6,10
The good news is that even if your credit score has a few dings, you still have options.
3. Know Your Debt-to-Income Ratio
Your debt-to-income ratio (DTI) measures how much of your total income goes toward paying off debts and interest each month. A lower DTI is favorable when it comes to meeting mortgage requirements and your ability to repay the loan.8
To calculate your DTI, add up all of your monthly bills. These expenses include rent, credit card and loan payments, and any other regular monthly debt payments you make. Then divide this amount by your gross monthly income (the amount of money you make before taxes and deductions are made). Multiply that number by 100, and you have your DTI.
Lenders use your DTI to determine whether you can comfortably handle the additional financial responsibility of a mortgage payment alongside your existing debts. According to the rules set by the Consumer Financial Protection Bureau, the total debt-to-income ratio, including the mortgage and associated costs, should not exceed 43% of your gross income.9 If your DTI goes above this threshold, it becomes more challenging to get a mortgage.
So, how can you decrease your DTI? One approach is to reduce your overall debt by making timely payments and paying down outstanding balances. Also, finding opportunities to increase your income can help improve your debt-to-income ratio.
But remember, it’s important to think about the long term when considering an increase in income. Make sure that any boost in earnings is sustainable and will continue in the future. This way, you can confidently afford mortgage payments without facing financial difficulties down the line.
4. Find a Real Estate Agent
Now, it’s time to reach out to real estate agents and set up initial meetings or phone calls. It’s a good idea to interview a few agents to find the one who clicks with your communication style and knows the area where you want to buy like the back of their hand. Look for an agent who not only guides you through the homebuying process, but also brings fresh perspectives and insights to the table.
A great agent will help you understand the ins and outs of buying a home, and they’ll be honest with you when the price or your expectations don’t quite match up. They’ll share valuable tips that you might not have considered before.
Teaming up with the right real estate agent can make all the difference. They’ll use their expertise to educate you, advocate for your best interests, and help you find the perfect home that checks all your boxes. So, take your time to find an agent who’s not only knowledgeable but also someone you feel comfortable working with.1, 3
5. Find a Lender
When it comes to finding a lender, it’s important to fully explore your options. Each financial institution establishes its own loan rates, and even a small difference of a percentage point can accumulate into substantial savings over a 15 or 30-year period.1
To start, it’s worth checking with your current bank, as they may offer you a competitive rate due to your existing relationship with them. However, don’t overlook credit unions, small community banks, and online lenders. The more lenders you consider, the higher your chances of securing the best possible rate.
A valuable resource for researching and comparing interest rates is a mortgage calculator or tool. It allows you to gather information and make informed comparisons, empowering you to make the best decision for your financial situation.
6. Apply for a Mortgage Preapproval
Getting preapproved for a mortgage will make it easier to shop for homes, as you’ll have a more exact budget available to work with. Additionally, real estate agents may only work with you once you’re approved with a budget in hand.
Your lender will provide you with a checklist of the required documentation they will need in order to preapprove you for a mortgage, as well as pull your credit report. Typically, it includes proof of your income, debts, assets, and employment. You’ll need to provide pay stubs, tax returns, bank statements, W2 forms, and employment verifications to show that you can handle a mortgage.
The preapproval process is usually quick since it’s not a binding agreement, so the bank won’t need to verify every single document. However, the actual mortgage approval process can be more extensive, as your loan application is formally reviewed by an underwriter. You may need to provide extra documents at this step depending on your situation and type of mortgage you’re applying for. Both your real estate agent and lender should be available to help you get through this process as smoothly as possible.5
7. Set Aside Closing Costs
Closing costs refer to the fees and charges that you’ll need to pay to various parties when finalizing the purchase of a home. These are paid on closing day in addition to your down payment. At your closing, be sure to have all of your available funds in order for as seamless a transaction as possible.
Your lender will provide you with a detailed estimate of the specific costs involved. On average, closing costs typically range from 2% to 5% of the home’s purchase price. For instance, if you’re buying a $300,000 home, you can expect to pay around $6,000 to $15,000 at the time of closing.
Some common examples of closing costs include fees for a credit report, application, property registration, title insurance, underwriting or processing, closing, escrow, information verification, prepaid interest, and surveys. These charges vary depending on the location, loan type, and specific circumstances.
It’s important to review the estimated closing costs provided by your lender and factor them into your budget when preparing to purchase a home. Understanding and preparing for these expenses will help ensure a smoother and more financially sound closing process.1,3,7
How Much Money Should I Save Before Buying a House?
When it comes to saving money before buying a home, you’ll want to have a solid financial foundation. Generally, it’s recommended to save enough for a down payment, which typically ranges from 5% to 20% of the home’s purchase price. Additionally, it’s wise to have some extra funds set aside for closing costs, moving expenses, and potential unforeseen expenses. Building an emergency fund to cover three to six months’ worth of living expenses is also advisable. Remember, the more you save, the better your financial position will be when purchasing a home.2,3
Divvy Could Get You Ready to Buy a House
Divvy is an innovative program that helps lower the barrier to homeownership through its rent-to-own program. With Divvy, you have the opportunity to rent a home while gradually building your savings and working toward owning it. It’s a flexible path to homeownership, allowing you to select a home for sale on the market and enter into a lease agreement with the option to purchase it in the future.
Grant is a member of the marketing team and focuses on connecting aspiring homeowners in our metros with Divvy. He's worked on marketing teams spanning all parts of the homeownership journey, including home loans, power tools and home improvement, siding and flooring, and now Divvy. Grant graduated from Villanova University and became a homeowner in 2021.